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July 13, 2011

Fed's Bernanke Floats Possibility of QE3

In exchange with Ron Paul at House hearing, Fed Chairman says gold is not money

Fed Chairman Ben Bernanke. (Photo: AP)

Despite comments to the contrary made as recently as June 22, the Federal Reserve is ready to ease monetary policy if the economy weakens further, according to comments made Wednesday by Ben Bernanke.

The catalyst for floating the possibility of further stimulus, also known as QE3, is the downward revision of recent forecasts and the incorporation of last week’s weak employment figures, which indicated an increase in national unemployment to 9.2%.

Noting that the recent “weaker-than-expected economic performance appears to have been the result of several factors that are likely to be temporary,” Bernanke specifically named a run-up in prices of energy, especially gasoline and food, which has reduced consumer purchasing power. He also again alluded to supply chain disruptions from the earthquake in Japan.

But, he said, the apparent stabilization in the prices of oil and other commodities “should ease the pressure on household budgets, and vehicle manufacturers report that they are making significant progress in overcoming the parts shortages [due to Japan’s earthquake] and expect to increase production substantially this summer.”

However, "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support," Bernanke told the U.S. House of Representatives Financial Services Committee.

Bob Stein, senior economist with Wheaton, Ill.-based First Trust Advisors, found little surprise in the testimony.

“There wasn’t really any news in what the chairman said,” Stein said. “And that, in and of itself, is newsworthy. He really stuck to the Fed’s corporate line, which is that it will soon stop reinvesting its dividends and will stop using the “long term outlook” line before raising rates, probably in the first half of 2012.”

As for raising the issue of QE3, Stein believes too much is being made of the comment.

“It’s always been a possibility,” he says. “If the recovery doesn’t work out as expected, then of course action could be taken by the central bank.”

Axel Merk, principal and portfolio manager of currency investment firm Merk Funds noted an exchange in the Q&A portion of the testimony between Bernanke and

Rep. Ron Paul, R-Texas, in which Bernanke indicated he did not consider gold to be money. When further pressed by Paul as to why central banks hold gold reserves, Bernanke suggested gold is simply held because of tradition.

“In the past, Bernanke has testified that going off the gold standard has helped the U.S. recover faster from the Great Depression than other countries that held on to the gold standard for longer,” Merk wrote in a statement following the Fed Chairman’s testimony. “Bernanke has argued that a weak dollar is not inflationary (we disagree). The action of buying government securities by a central bank causes such securities to be intentionally overvalued; rational investors may look overseas for less manipulated returns.”

Not surprisingly, Merk added, the U.S. dollar moved sharply downward as Bernanke began his testimony.

“Technically, Bernanke is right,” Stein said. “Gold was used as money for centuries, but now it is the basis for money, as opposed to money itself. This is where Bernanke and Greenspan would differ in their view. But I think Bernanke is now more comfortable in his Chairman, and was probably just tweaking Ron Paul.”